Tax sale auctions, good or bad idea?

Question

How can one make sure that risks are mitigated as much as possible when participating in such online auctions? I’m considering taking part in the San Diego county  deed tax sale this year for the first time and I wanted to get some advises on this matter? Should I even bother participating?

Dan H. · Answer

I have participated in that auction.  The list of potential auction properties is published.  Most of that list will be resolved prior to the auction.  That makes doing due diligence difficult.

We started with a list of maybe 2 dozen properties that interested us.  When we drove by, more than half were strange properties that would present issues.  Items like on a steep hillside with house on stilts above a freeway.  An attached property that had a door that led to the roof of the auction property that had couch, table, fridge, etc on the roof.  A property that required crossing multiple easements in various quality road to get to the structure.  I kid you not, some of these properties you would never believe was in San Diego and looked more appropriate for TJ.

After visiting the properties, we were down to maybe 8 that we still had interest in.  By a couple days prior to the auction that was down to 4.  We then used our contacts to do a preliminary title check on those properties.  By the time the auction started there was 1 RE left from our original list.  It was in remote area of Vista.  Not ideal for us.   We bid above 70% of value (value of ~$700K).  It sold for over 80% of value without being able to see the insides.  I believe San Diego is home to some of the most efficient flippers anywhere, but the remoteness of the RE would make it challenging to make a good profit on a flip (I know I could not have made a profit at that selling price but I also know I am a longs ways from some of the flippers).  I suspect it was likely bought to be owner occupied.

I believe the process is broken.  I do not believe that allowing the owner to still recover the property after it is published for auction provides the best opportunity to obtain the best price.  This is because of the time commitment that is exerted on properties that will not be available.  This is bound to turn off some prospective buyers.

I also recommend you have a drone.  The RE that required crossing multiple easements had a junk pile partially obstructing the road.  The people residing at the auction property used their trucks to just drive over it.  Good luck rehabbing or renting that property.

Jaron Walling · Answer

Buying tax deeds requires extensive due diligence just like any other deal. The properties up for auction can be full of surprises. I created a spreadsheet and a Google doc's map to show me locations and details of each property. Some counties update the list each week before the sale, meaning the property you WANT is no longer available. Fun Fact: some investors target those properties for off market deals. Anyway, I narrow my search and dig a little deeper on ARV, rental rates, etc. The chances of redeeming a nice property are slim but the principle + interest payout is lucrative depending on the county. It's like 10-15% in my market, can't remember.

You'll notice some properties receive ZERO bids. Some reasons are terrible location, poor condition, parcel size issues, liens on the property, problems you see from the road. In my market the tax sales have power players with fat CASH. They bid up good properties to numbers that ruin the deal, but economies of scale, reliable contractors, and REI experience makes it work for them.